The bottom line The efficient market hypothesis is a useful framework for modeling financial markets Like any model, the efficient market hypothesis is not a perfect description of reality; some prices are almost certainly wrons However, it would be naive to think that prices are al ways wrong or that it is easy to exploit pricing errors Instead of asking whether or not the market is efficient, the more relevant questions are -how efficient is the market? ---how does the market react to new information arrivals? And why? c--what are the mechanisms that bring market prices to fundamental values?The bottom line • The efficient market hypothesis is a useful framework for modeling financial markets. • Like any model, the efficient market hypothesis is not a perfect description of reality; some prices are almost certainly “wrong”. • However, it would be naïve to think that prices are always wrong or that it is easy to exploit pricing errors. • Instead of asking whether or not the market is efficient, the more relevant questions are: • ---how efficient is the market? • ---how does the market react to new information arrivals? And why? • ---what are the mechanisms that bring market prices to fundamental values?